Savings vs Investment: How to manage the two to become wealthy

One thing is clear that one needs to save money to invest. Unless you consume less money than what you earn, you can’t save any money for investment. More you save by curtailing present unessential expenditures, more money you would accumulate for your future. So, as suggested by Warren Buffett, “Don’t save what is left after spending; spend what is left after saving.”

However, the question is putting money in which instrument is considered as saving and which is considered investment?

Saving is nothing but keeping aside some money from what you earn, which you may keep at your home or at a bank, where you would earn some fixed interest – be it a savings account or a time deposit account.

Going by this logic, the money you put in a bank fixed deposit (FD) is part of your saving. This is because, FDs are neither tax-efficient instruments nor they able to beat inflation after tax deductions. As a result, money locked in bank FDs lose purchasing power in long run.

So, to qualify for investment, an instrument has to provide enough return that may beat inflation to grow and generate higher purchasing power in long run. For that the instrument either need to be tax efficient or need to generate enough return to beat the rate of inflation even after tax deductions.

As the rate of interest on fixed-return instruments are linked to inflation, unless they are tax-efficient, the money invested would lose purchasing power over time.

So, to qualify for investment, your money shouldn’t lay idle or lazy to lose purchasing power, but should work hard to grow over time. To make your money work hard for you, you need to take some calculated risks, so that it grows over time at a faster rate than inflation and create wealth for you.

If you look at the wealthy persons, you will find that it is mostly the successful businessmen, who took risk and invested money in new ventures, have earned profits to generate wealth over time. On the other hand, like FD investors, salaried people work hard, but get fixed salary that mostly increases at the pace of inflation.

So, unless salaried people invest properly, their purchasing power would just remain intact over time.

However, to invest, you needn’t put your entire investment at risk by starting a new venture, but you may take the equity route to get benefits of the profitability of successful businesses.

To reduce the risk further through diversification, it would be even better to enter the equity market through mutual fund (MF) instead of investing in direct equity.

As equity investments are subject to market risks especially in short run, you should never invest money needed in short notice in equity, but invest only that part of money, which may spare for long-term. This is because, despite short-term fluctuations, equities gradually rise over time and market risks gradually fade away.

To cushion the market fluctuations further, it is even better to invest through a systematic investment plan (SIP) instead of lump sum investments in equity.

So, to get a share of wealth of the wealthy business houses, don’t just save money, but take some calculated risks and investment in equity though SIP in in an equity mutual fund.

Source: Financial Express